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Liquid alts become fastest growing asset class

Liquid alternativesLiquid open-ended alternative funds have become the fastest growing asset classes in the UK and European-domiciled cross-border fund market since the 2008 global financial crisis, according to a report published Monday (4th).

Morningstar’s “Cross-Border Liquid Alternative Fund Landscape 2019” study shows that the number of such funds, known in the trade as “liquid alts”, has risen by 76% over the last ten years to 2,663.

Meanwhile, assets in such funds increased tenfold over the decade to €420 billion.

The report also found that:

  • European cross-border investors' demand for alternatives now exceeds interest found in the US mutual fund market, where investors' regard for the asset class started to diminish in 2016 because of the lacklustre performance of alternative products as well as rising interest rates in the US, which allowed investors to get a more decent yield from bonds.
  • Fees remain the main factor hampering the appeal of liquid alternatives, as they directly eat into investors' performance to dramatic levels as a percentage of net returns.
  • Turnover has been high in the liquid alternative fund universe. On average, 324 new funds have been launched each year since 2009—more than one per banking day.

Matias Möttölä, associate director for multi-asset and alternatives at Morningstar, said: “Growth of hedge-fund-type strategies in a more liquid format has been fuelled by low bond yields, favourable regulatory changes, and vibrant product development.

“However, the liquid alternative funds universe is mostly filled with young, untested strategies with a low asset base, and high fees in relation to the returns delivered so far, which represents a challenge for fund selectors.

“Overall, investors need to be mindful that despite the large inflows, this space is still in growth mode and far from mature.”

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